Why Form a Panama Corporation: Key Advantages and Disadvantages

One major advantage of forming a corporation in Panama is the ability to protect personal assets through limited liability, while one notable drawback is the need to comply with local legal formalities and annual maintenance requirements.

A Panama corporation offers both foreign and local entrepreneurs a strategic vehicle for international business, asset protection, and tax planning, though it’s not without administrative obligations.

This article will cover:

• What are the advantages and disadvantages of the corporate form in Panama?
• What is a corporation type of business in Panama?
• What is the tax system in Panama?
• What is the corporation law in Panama?

My contact details are hello@adamfayed.com and WhatsApp ‪+44-7393-450-837 if you have any questions.

The information in this article is for general guidance only. It does not constitute financial, legal, or tax advice, and is not a recommendation or solicitation to invest. Some facts may have changed since the time of writing.

What are the 4 types of business ownership in Panama?

Panama officially recognizes four common types of business ownership:

• Sole proprietorship: A business owned by one individual with unlimited personal liability.
• Partnerships: Either general or limited, where liability is shared among partners.
• Limited liability company (SRL): Offers liability protection to members and is subject to more administrative requirements.
• Corporation (Sociedad Anónima or SA): A popular vehicle for both domestic and offshore businesses, with distinct legal personality and shareholder liability limited to capital contributions.

What kind of company is a corporation?

A corporation in Panama, known as a Sociedad Anónima (SA), is a distinct legal entity that exists independently of its shareholders.

This means the corporation can own property, open bank accounts, enter into binding contracts, sue or be sued, and conduct business entirely in its own name.

It’s one of the most widely used business structures in Panama due to its flexibility and legal protections.

To establish a corporation, you need at least one shareholder and three directors.

All can be individuals or legal entities of any nationality, and they are not required to reside in Panama.

Corporate bylaws govern how the company operates, and a local registered agent must be appointed to handle official communications.

Key differences vs other business types:

• Legal liability: A corporation provides the highest level of liability protection, legally separating business obligations from the personal assets of its owners.
• Continuity: Corporations have perpetual existence. The death or withdrawal of shareholders or directors does not dissolve the entity, unlike in sole proprietorships or partnerships.
• Governance: Corporations are required to maintain a formal structure with a board of directors, which is not necessary for simpler entities like sole proprietorships or general partnerships.
• Disclosure: One of the unique benefits in Panama is shareholder anonymity. Unlike directors (whose names are filed publicly), shareholders are not disclosed in the public registry, offering a layer of privacy.

Panama corporation law

Panama corporations are governed by Law No. 32 of 1927, which remains one of the most flexible and business-friendly corporate laws in the region.

It allows:

• Formation by any two individuals (or their legal representatives), regardless of nationality.
• No requirement to hold annual meetings in Panama.
• Bearer or nominative shares (though bearer shares must be held in custody).
• Use of nominee directors and shareholders for privacy.

There is no minimum capital requirement, and corporations are not required to file annual financial statements unless conducting business within Panama.

Why do companies incorporate in Panama?

Panama is among the top destinations for international incorporation due to its unique blend of tax benefits, confidentiality, and ease of doing business.

Companies choose Panama to establish a flexible, low-maintenance legal entity with global reach.

What are the advantages and disadvantages of a corporation in Panama?

Advantages of a Panama Corporation

• Limited liability for shareholders
  One of the most important advantages is that shareholders are not personally liable for the debts and obligations of the corporation. Their risk is limited to the amount of their investment.
• Confidentiality through nominee structures
  Panama allows the use of nominee directors and shareholders, enabling individuals to maintain privacy. The names of actual beneficial owners are not publicly disclosed in the registry.
• No nationality or residency restrictions
  Foreigners can own 100% of a Panama corporation. Directors, shareholders, and officers can be of any nationality and reside anywhere in the world.
• Tax exemption on foreign income
  Under Panama’s territorial tax system, foreign-sourced income is not taxed. This makes it an appealing choice for international businesses that don’t operate within Panama.
• Ease of maintenance
  Panama corporations have minimal annual reporting and bookkeeping requirements compared to many other jurisdictions, making them relatively low-maintenance once established.
• Fast setup process
  Incorporation typically takes 3 to 5 business days, allowing for quick deployment of corporate structures.

Disadvantages of a Panama Corporation

• Mandatory use of a local resident agent
  Every corporation must appoint a Panamanian lawyer or law firm as its resident agent. This adds a recurring compliance cost and dependence on a local professional.
• Restrictions on certain business activities
  Some professions and activities (e.g., legal, medical, and certain financial services) are restricted to Panamanian citizens or permanent residents. Foreign-owned corporations may not engage in these areas.
• Ongoing costs
  While setup is fast, maintaining a corporation involves annual expenses: the USD 300 franchise tax, legal fees for the resident agent, and possibly costs for nominee services or document updates.
• Perception and due diligence risks
  Although perfectly legal, Panama corporations can be subject to increased scrutiny due to associations with tax avoidance or offshore secrecy. This may create challenges when opening international bank accounts or dealing with compliance-heavy jurisdictions.

What is the corporate governance in Panama?

Key elements of corporate governance in Panama include:

• Board of Directors: Every Panama corporation must appoint at least three directors, who may be of any nationality and need not reside in Panama. The board is responsible for high-level decision-making, such as approving contracts, managing assets, and setting strategic direction. Directors’ names must be listed in the public registry.
• Corporate Officers: Panama law requires corporations to appoint at least three officers typically a president, secretary, and treasurer. These roles can be filled by the same individuals who serve as directors. Officers handle the day-to-day operations of the company, and their responsibilities are usually outlined in the bylaws.
• Resident Agent: A licensed Panamanian lawyer or law firm must serve as the corporation’s resident agent. This agent acts as the legal point of contact in Panama and is responsible for receiving official communications, ensuring the company remains in good standing, and handling certain regulatory filings.
• Shareholder Meetings: Shareholder meetings are optional and can be held anywhere in the world, not just in Panama. This flexibility benefits foreign investors or multinational operations. Votes may be conducted by proxy, and meetings can often be waived if agreed upon in writing.

Is there corporate tax in Panama?

Yes, there is corporate tax in Panama, but the country’s territorial tax system sets it apart from many other jurisdictions.

Under this system, only income generated from within Panama is subject to corporate tax.

This makes Panama an especially attractive jurisdiction for international entrepreneurs, holding companies, and offshore service providers.

Key points of Panama’s corporate tax regime include:

• Panama-sourced income is taxed at a flat rate of 25%. If a company earns revenue from commercial activity carried out within Panamanian territory such as sales to local clients, contracts performed locally, or income from real estate, it will be subject to this standard corporate income tax rate.
• Foreign-sourced income is entirely exempt from Panamanian taxation. This means that profits earned from activities conducted outside of Panama (for example, online services provided to foreign clients, international trading, or consultancy services delivered abroad) are not subject to corporate tax in Panama.
• Dividends from foreign-source income are not taxed. If a Panama corporation distributes profits that were generated outside of Panama, those dividends are not subject to dividend withholding tax. However, dividends derived from Panama-source income may be subject to a 10% tax on the distributed amount.
• Annual franchise tax: Every Panama corporation must pay an annual franchise tax of USD 300 to remain in good standing with the Public Registry. This is separate from income tax obligations and is required even if the company has no taxable income or activity.

Conclusion

Panama corporations continue to serve as a reliable and attractive vehicle for international business.

With a sound legal base, favorable tax system, and investor-friendly policies, they offer clear benefits, so long as the limitations are understood and managed properly.

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